The Debt Scenario You Should Believe

Each year the Congressional Budget Office publishes its Long Term Budget Outlook, it presents two different scenarios that project the future value of the publicly-held portion of the national debt: the Extended Baseline scenario and the Alternative Fiscal scenario. Because the two have very different assumptions behind them, the question of which scenario is more believable always comes up.

The CBO’s Extended Baseline scenario assumes that the U.S. government will follow the laws that apply to its spending and taxation exactly as they are currently written. For example, if the law for an income tax credit was written so that it would expire 10 years after it was passed, the CBO would assume that would actually happen right on schedule. Under the Extended Baseline Scenario, the CBO would project that the federal government will collect more tax revenue indefinitely into the future after the tax credit has expired.

The CBO’s Alternative Fiscal Scenario however assumes that elected officials won’t let that happen, particularly for popular programs and tax cuts that they’ve previously acted to extend beyond their original expiration dates. One example is the popular child tax credit, which was previously set to expire at the end of 2012, but which was instead extended through 2017. Under the Alternative Fiscal Scenario, the CBO assumes that politicians will act to make these kinds of programs permanent.

The question of which scenario is more believable can be answered by comparing a previous year’s projections of the future against the actual results that were recorded in the years that had been projected. Below, the projections of the publicly-held portion of the U.S. national debt from the CBO’s June 2009 Long Term Budget Outlook for the years 2009 through 2015 are compared with the actual results that the CBO reported in its July 2016 Long Term Budget Outlook.

The Alternative Fiscal Scenario is the clear winner in coming much closer to the actual results than the Extended Baseline Scenario. That result holds even though the way that GDP is calculated was changed in July 2013 as part of a major revision.

At the same time, the actual results through 2015 were much worse than what the CBO had projected for both scenarios in 2009.

The CBO provides the following chart in its July 2016 Long Term Budget Outlook to consider several different scenarios for the publicly-held portion of the national debt in the year 2046. The bars on top represent the Extended Baseline Scenario, while the set of bars on bottom represent its latest Alternative Fiscal Scenario, which actually dates back to 2015. In between are two other sets of illustrative scenarios.

In 2046, the CBO’s Extended Baseline Scenario is that the publicly-held portion of the U.S. national debt will be equal to 141% of GDP. The CBO’s Alternative Fiscal Scenario is that the ratio of the public federal debt to GDP will actually be equal to 193% in 2046.

Neither future scenario is guaranteed, because there is a lot of time between 2016 and 2046. The U.S. government could enact a combination of spending cuts and tax increases that will change those percentages, just as it did in 2013, which greatly changed the speed at which the size of the national debt was growing with respect to GDP.

The reason I’ve opted to discuss this topic today is because the CBO’s Long Term Budget Outlook for 2016 omits any update to the Alternative Fiscal Scenario, even though the Extended Baseline Scenario saw significant changes. Instead, the CBO has pointed to its 2015 Alternative Fiscal Scenario, which given other changes, is now clearly out of date.

If, like the Extended Baseline Scenario, it shows a deterioration of the nation’s fiscal situation, we Americans need to know just how much worse the Alternative Fiscal Scenario has become. It is, after all, the more believable scenario.

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